Congressional Testimony: Advancing U.S. Business Investment and Trade in the Americas

ADVANCING U.S. BUSINESS INVESTMENT AND TRADE IN THE AMERICAS

HEARING BEFORE THE U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON FOREIGN AFFAIRS
SUBCOMMITTEE ON THE WESTERN HEMISPHERE
JUNE 7, 2018

ERIC FARNSWORTH
VICE PRESIDENT
COUNCIL OF THE AMERICAS

• Watch a video of the hearing.

*** As Prepared for Delivery ***

Good afternoon, Mr. Chairman, Mr. Ranking Member, and Members. It is a privilege to appear before you again. I am pleased to offer testimony on ways to advance U.S. business investment and trade interests in the Americas. Thank you for the opportunity to join this timely and important hearing.

The Prevailing Circumstances of Hemispheric Trade and Investment Relations

The news from last week that the Trump Administration has decided to move forward with steel and aluminum tariffs on Canada and Mexico as well as Europe, with the possibility of additional future tariffs, coupled with cancellation of U.S. participation in the Trans-Pacific Partnership and an aggressive effort to reformulate and recast NAFTA, have roiled hemispheric trade and economic relations. Where once the United States was unquestionably the leader in promoting open markets and investment climate reforms across the hemisphere, Washington has now become a disruptor.

These actions have introduced a significant element of uncertainty into the trade and investment calculus along with normal and anticipated emerging market risks in Latin America and the Caribbean Basin. And increasing uncertainty is, to be blunt, bad for business. With rising costs, patterns of trade shift, including sourcing and fully integrated supply chains that drive production. Meanwhile, investments are delayed or not made at all, and productivity lags.

As the United States retrenches, others are quick to fill the void, with China in the lead. China would still be a major presence in the Americas, of course, as it is in other emerging markets globally, even under a more traditional U.S. approach to trade. But Washington’s recent actions are accelerating pre-existing trends to the point where we may soon reach an inflection point making impossible a return to the status quo ante. This would be a self-generated and unnecessary strategic setback for U.S. interests in the Western Hemisphere.

Specific Near-Term Actions to Consider

Within this framework, absent a policy shift, there are nonetheless any number of things that can be done to advance U.S. commercial interests in the hemisphere to the extent we are inclined to prioritize them.

The first is to be present, and Vice President Pence’s announcement Monday that he will soon travel for the third time to Latin America in less than a year is welcome news. We also applaud Secretary of State Mike Pompeo’s presence at the OAS General Assembly this week and the leadership of UN Ambassador Nikki Haley on Venezuela. Such efforts must be sustained. Effective commercial diplomacy also requires that the United States have diplomats and senior officials in place to conduct day-to-day activities including the promotion of U.S. business. To name one example, we are just five months away from the mid-term elections and still have no Senate-confirmed Assistant Secretary of State for the Western Hemisphere, although I understand an outstanding candidate has been identified. Personnel are policy, and it’s difficult to have an effective policy without the right people in place to develop and implement it.

Second, we should refrain from affirmatively taking steps that would actually reduce the U.S. investment presence in Latin America and the Caribbean. A perfect example is the ongoing effort to excise investor-state dispute settlement provisions from NAFTA, which would cause U.S. energy and other investors to re-evaluate their investment plans going forward, particularly if the incoming president of Mexico, whoever may be elected on July 1, seeks to rein in energy sector reforms implemented by the outgoing government. Rule of law remains imperfect in Mexico, as it does across much of the region, and investors will be less likely to commit significant additional resources without greater judicial certainty. But Mexico’s hydrocarbon deposits will remain, thus opening the door wider to greater sectoral investment from China, Russia, and other extra-regional actors. The same is true with other provisions being pushed by the United States in ongoing NAFTA negotiations, including dispute resolution, government procurement, and a five-year sunset clause.

Third, as the region develops alternatives to the United States, we have to contend more actively for regional commerce. No longer is the United States the only game in town, if we ever were. Competition is fierce, and we must, as a result, compete. It’s one thing to promote the United States as a preferred partner for the region—and indeed I believe that that is the case—but partnership requires sensitivity to the needs of others and a search for mutually rewarding solutions on issues that matter most to us and also to them. China understands this, even if execution is not always perfect. But unless Washington is willing to engage with the region on the basis of true partnership, we will continue to lose ground to others with a different approach. A full push to return Venezuela to the democracy path is welcome, no doubt, but regional policy must also be based more broadly on seeking and consummating shared opportunity with regional partners and friends.

Finally, I believe that we need to get a better handle on how our scarce aid resources are spent. Indeed, we should increase rather than decrease foreign assistance. But no matter what levels of assistance are appropriated year to year, we should make every effort to prioritize trade facilitation and business climate reforms. Working with Latin American and Caribbean partners to address obstacles to U.S. trade and investment including insufficient infrastructure, weak rule of law, inadequate workforce development, and deteriorating personal security among others would go a long way to helping create conditions attractive for U.S. commercial engagement and sales. Over the past generation, the region took concrete steps to solidify the macro economy and, with the obvious exception of Venezuela and a handful of others, the region is far ahead of where it used to be. Nonetheless, inadequate efforts were made to reform the micro economy, which has proven to be the Achilles heel for regional development and where enhanced U.S. commercial diplomacy and assistance could usefully be directed.

Improved Development Finance Is Key to Competitiveness

As well, we face a new challenge from China and other nations who are able to use development finance more effectively than current authorities allow the United States to do. U.S. efforts are limited in size, scope, and a diffusion of authorities across too many agencies. This is a perennial issue, which the prompt passage and implementation of the BUILD Act establishing a full-service, self-sustaining U.S. International Development Finance Corporation would help to address. Without streamlined and enhanced development finance activities it will be increasingly difficult for the United States to compete effectively in Latin America and the Caribbean, and we should give attention to this matter as a priority.

Mr. Chairman, thank you again for the invitation to appear before you and the Subcommittee today. I look forward to your questions.

*** Questions for the Record ***

1. State Department Role in Advancing U.S. Business Engagement in Region

• How can the State Department help to spread successful best practices from Mexico, Chile, Peru, Colombia, and Costa Rica, which are rated the highest in the World Bank’s “Ease of Doing Business” ranking, throughout the Western Hemisphere?
• How could the State Department more effectively advance U.S. commercial interests in the region?

The State Department has a critically important role in advancing U.S. business interests in the Americas, and several steps ought to be considered in the near term to spread best practices and to support U.S. commerce.

In the first instance, the department needs a full complement of Senate-confirmed senior officials, including the assistant secretary of Western Hemisphere Affairs, and the secretary of state must make clear to the leaders of all bureaus and U.S. missions abroad that the promotion of commercial interests is a core aspect of their duties which will, in part, drive promotions and career advancement. We are now almost at the mid-term elections, and essential positions both in Washington and abroad remain unfilled. We can do better than this and must.

Second, the department should actively solicit input from the private sector in terms of specific actions that can be promoted which will advance commercial interests, both at the political and working levels, and then work specific, actionable, and appropriate ideas into the broader agenda. There are multiple steps that could be taken to support U.S. business while at the same time building target-nation competitiveness. The key, however, is that input received from the private sector must then be factored into U.S. policy and assistance priorities, including USAID, MCC, and a multitude of other programs, not just presented to governments on a take it or leave it basis. There must be concrete follow-up and implementation. Much of U.S. assistance that goes for regional “development” simply follows pre-existing priorities without much focus on competitiveness or support for U.S. commercial interests that will, in fact, support the broader development that advocates seek. This is a perennial problem.

Programs for the Northern Triangle of Central America, for example, designed to create conditions that will lessen migration pressures, must be refocused. Increased technical assistance, regionalization of assistance to encourage cooperation among aid recipients, anti-corruption and the rule of law, and investment climate reforms can all be made urgent priorities. The State Department is not the implementation agency for these programs but should nonetheless exercise its significant role in leading U.S. foreign policy formulation to guide assistance programs toward more commercially relevant, and therefore sustainable, programs.

Third, the State Department must once again find its powerful voice in the context of U.S. trade policy. As the foundations of the U.S.-led global trade structure continue to be dismantled by the current administration, the United States is not only opening the door still wider across Latin America and the Caribbean for our direct competitors including China; it is also creating significant ill-will among our closest trading partners. That means higher tariffs on U.S. products, broken supply chains, and skepticism about seeking new U.S. goods and services particularly when alternatives are available, as they increasingly are. This directly undermines U.S. commercial interest in the region. No doubt it is the role of the State Department to implement a president’s policy under any administration, yet without a positive trade agenda the ability to promote U.S. commercial and strategic interests across the region will continue to suffer. At a minimum, this is a point that needs to be made clearly and often by senior State Department officials at every appropriate opportunity.

2. Energy Opportunities

In 2013, Mexico made some significant energy reforms. In 2014, Argentina’s reforms provided offshore explorations opportunities to investors and encouraged foreign ventures in the country’s shale reserves. In 2016, Brazil’s repeal of a requirement that its oil company (Petrobras) had to have a 30 percent stake in all operations involving its “pre-salt” offshore oil reserves also opened up new opportunities.

• Which countries in the region present the best opportunity for greater energy investment by U.S. companies?
• Which countries pose the most significant challenges to energy exploration and investment?
• What role do you see the State Department playing in advancing U.S. business energy investment in the region, particularly in the Caribbean and in exporting U.S. liquefied natural gas (LNG)?

Perhaps more than any other resource-rich region, Latin America routinely endures pendulum swings of resource nationalism in response to commodity price cycles and other political factors. The regional sectoral map is uneven for U.S. investors.

Brazil is an attractive market for further energy investment by U.S. industry. Unlike other countries in Latin America, Brazil has never reneged on an energy contract, attesting to the emphasis it places on private investment in one of its most strategic sectors. The geological risks of its pre-salt basins are low, the quantity of its pre-salt reserves are vast, and the productivity of the resources is among the highest in the world. But geology alone does not make for an attractive investment climate, as the collapse of Venezuela’s oil sector has proven. Brazil’s governance of its hydrocarbons sector is welcoming of foreign investment, characterized by a trajectory of pro-market reforms in its upstream. The lifting of Petrobras’s minimum equity and operator mandate allows greater operational flexibility for private investors. The government has also eased previously stringent local content rules and extended until 2040 a favorable customs and tax regime for industry that facilitates the import of goods and services to develop offshore resources. Brazil has also built out a calendar of bid rounds for the next several years that provides consistency and predictability to investors. Elections in October will be an important indicator of the sustainability of sector openness.

As it currently stands, the profile of Mexico’s energy sector, aided by constitutional reforms to promote private sector participation, has tremendous complementarities with investment from U.S. industry. There is much at stake as the new Mexican president prepares to take office this year. Offshore reserves in Mexico’s Gulf benefit from proximity to U.S. operations, both in terms of geological familiarity and access to supply and support services. Approximately 90 percent of Mexico’s “proven” and “probable” reserves are still to be auctioned. SENER, Mexico’s energy ministry, has rolled out a five-year timetable of bid rounds to provide consistency for investor spending. Through December 2017, upstream auctions have generated $248 billion in revenues for the Mexican government, according to SENER. But Mexico’s energy opening is not limited to upstream exploration and production. Indeed, many of the benefits for Mexico’s day-to-day economy will come from reforms to its more downstream markets. Electricity sector reforms are creating a new wholesale power market to promote more cost-effective electricity capacity, reduce electricity costs, and transition Mexico to cleaner-burning fuels. The solution to most of those aims is natural gas—predominantly from the United States.

Other nations present differing pictures. Despite having the world’s largest proven oil reserves, Venezuela is no longer attractive as an investment target. Resource-rich Ecuador and Bolivia still have limited options for the concession-based or profit-sharing contract structures that private industry prefers. Colombia has a very market-oriented framework to encourage investment, but many of its upstream opportunities are constrained by tense relations between the government, industry, and local communities and NGOs in its oil and gas producing-regions. The new government of Iván Duque will have an opportunity to sort out these difficulties in a manner that restores sector attractiveness for investors.

Argentina boasts the largest commercial shale gas reserves in the world outside North America. Environmental resistance to industry operations does not run as deep as it does in other countries because of its long legacy of hydrocarbons production. And the resources themselves are the domain of state governments, an ownership structure that creates more buy-in at the local level. President Mauricio Macri and his government are working to unwind the worst excesses of the previous Kirchner government’s market interventions. Nonetheless, to exploit the country’s rich shale reserves and manage high operating costs stemming from labor to lack of infrastructure, industry relies heavily on subsidies from the central government that pay operators above-market prices for new gas developments. The broader political-economic landscape affecting Argentina’s fiscal situation perhaps calls into question how long Buenos Aires can continue to offer these producer subsidies.

In terms of the State Department’s role, energy diplomacy was brought into the department under Secretary of State Clinton, to provide a stronger diplomatic voice on global energy issues and to capture these issues bureaucratically. Results have been mixed. For example, we have long urged the department to form a regional gas council of major gas producing nations. Such a forum would be a clearinghouse for projects and best practices, including technical, regulatory, infrastructure, environmental, and other aspects of sectoral competitiveness, while providing a neutral place for dialogue on mutually beneficial matters with nations, such as Bolivia, where dialogue of any consequence is otherwise limited. Through Council of the Americas’ leadership, this idea was an original recommendation of the Americas Business Dialogue, which we co-founded, for the Summit of the Americas. Regional governments failed to act on the recommendation, but the State Department remains in a position to establish this important dialogue. Similarly, for years we have urged the United States to take a more proactive role in building out closer energy relations with the Caribbean Basin. From a security, commercial, and environmental perspective it makes sense. It is deeply frustrating that more has not been done to promote these issues more effectively, and it is long past time to see greater progress on these complicated yet very important issues.

3. Regional Crises

Venezuela is in the throes of a horrific economic and humanitarian crisis, resulting in the spread of thousands of refugees and evoking concerns of a public health crisis. The unrest in Nicaragua is also stirring up significant concern.

• How do economic and humanitarian crises like these affect the confidence of U.S. investors in the region?
• In your experience, have you seen other countries in the region do enough economically and politically to protect themselves from similar crises?

Venezuela is clearly a ruined state. Even if the Maduro regime were to quit office today it might take a generation or more to restore this once-proud and relatively wealthy nation. Regrettably, the Maduro government has not given any indications of its willingness to depart, subverting the democratic process to its direction and creating conditions which support its ambitions to remain in power indefinitely. Deteriorating conditions are not “just” a tragedy for Venezuelans, though; the aggressive, extra-territorial ambitions of the regime in Caracas, the breathtaking corruption at the highest levels of government which facilitate drug trafficking and cross-border criminal activities, and the humanitarian crisis caused by the regime that pushes thousands of desperate Venezuelans each day to seek shelter and protection in neighboring states have all profoundly impacted the region. This is a crisis that continues to develop and worsens daily. A return to some semblance of sanity, including a restoration of investment flows that will re-capitalize the energy sector and provide any hope for the future in Venezuela, can only begin with the departure from office of the current leadership.

While U.S. investors across all sectors have done what they could to continue operations in Venezuela, prevailing and anticipated conditions there have virtually eliminated any further interest in the country except among the most aggressive financial speculators. What is perhaps more complicated is whether individual crisis, including Nicaragua’s, impacts investor appetite across the region, or indeed for emerging markets as a class. We should be wary of making such a claim. Emerging markets investors are generally sophisticated and easily differentiate between Venezuela and Nicaragua and, say, Argentina and Costa Rica. Given the macro-prudential steps that many regional governments have taken over the years to increase resiliency in the face of economic challenges, the threat of contagion is similarly reduced.

More applicable in this current environment is the broader impact on emerging markets that a return to more normal interest rates and a turn toward protectionism in the United States is having, and the subsequent shift in capital flows across the class. Certainly, this scenario is not helped by the impression that Latin America is somewhat “troubled,” either by Venezuela’s collapse, Nicaragua’s growing civil conflict, a challenging regional elections cycle, some other factor, or a combination of all. But there are any number of positive examples of nations, such as Chile, which are well-managed economically and where the threat of meaningful political turbulence is remote. Latin America has seen this movie before, with sequels more numerous and interesting than the Star Wars franchise. Responsible leaders in the region continue to monitor events and take actions accordingly.